Cayman Islands:
Consequences Of Keeping Minority Shareholders Out In The Cold

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The case of Tempo Group Limited & Ors v Fortuna
Development Corporation & Ors1 centred on
a dispute between the three principal owners of Fortuna Development
Corporation ("Fortuna"), a Cayman
Islands incorporated holding company. The main issues in
question were whether the three owners had agreed that one of them,
Dr Chen, was to be guaranteed a seat on the board of directors and
whether his subsequent removal from the board at the extraordinary
general meeting ("EGM") was valid.
On the first point, the Court found that there was no agreement
which entitled Dr Chen to a position on the board. However,
Dr Chen was re-instated to the board because the EGM at which he
was removed was found to be a nullity.

Background

Fortuna was established in 1994 to hold various significant
investments in Vietnam including amongst others a power plant, a
large land development and other infrastructure. Its three
major shareholders were holding companies, each of which owned by
Dr Chen, Mr Ting and Mr Tsien, respectively. On 22 June 2004,
an EGM was held in Beijing. Despite Dr Chen's objections,
Mr Ting and Mr Tsien were successful in passing a number of special
and ordinary resolutions. These included the removal of Dr
Chen from his position as a member of the board and greatly
restricted his right to deal with his shares. The special
resolutions required approval by a two thirds majority of the value
of the shares in the company. The special resolutions could
not have been passed without the support of Maxima Resources
Corporation ("Maxima"), which owned 5
per cent of the outstanding shares. Mr Niu claimed to be the
sole director and shareholder of Maxima and sought admission to the
EGM. Mr Niu intended to support Dr Chen and thus prevent the
special resolutions from being passed. However, Mr Niu was
refused entry to the EGM. Instead Mr Tsien, the Chairman of
the meeting, purported to vote in favour of all of the resolutions
as the corporate representative of Maxima.

The defendants claimed that the true beneficial owner of Maxima
was Mr Niu's mother, and that she had authorised the issuance
of bearer shares and given legal ownership of Maxima to Mr Tsien
and his wife (Mrs Niu's daughter). Furthermore, the
defendants alleged that Maxima had authorised Mr Tsien to vote on
its behalf at the EGM (the
"Authorisation"). On the
defendants' case, Mr Niu had no right to represent Maxima at
the EGM and all of the resolutions, both ordinary and special, were
and remained valid.

The plaintiffs claimed that Mr Niu, and not his mother, was at
all times the beneficial owner of Maxima and its sole director.
On the plaintiffs' case, the bearer shares were not
validly issued so the legal ownership of Maxima remained with Mr
Niu, its sole registered shareholder. The issuance of the
bearer shares and the Authorisation were not done in good faith.
Mr Niu was deliberately and dishonestly excluded from the EGM
and this rendered the meeting and all business transacted at it a
nullity and incapable of ratification.

Decision

The Court found that the Chairman of the EGM had created the
Authorisation unlawfully and relied upon it to exclude Mr Niu, the
shareholder and actual representative of Maxima, in order to pass
the special resolutions. The Chairman of the EGM had no valid
authority to represent Maxima at the meeting.

It was held that Mr Niu's exclusion from the EGM was not the
result of an accident, mistake or technical misunderstanding.
It was a deliberate decision made by Mr Tsien in the
knowledge that such exclusion was illegitimate. Consequently,
neither the deeming provision in Fortuna's articles of
association nor the principle of indoor management (established in
Foss v Harbottle) applied to save the resolutions.
In order for them to do so, the majority shareholders would
need to have acted regularly, or the misapplication of Maxima's
vote would need to have occurred through an error, neither of which
was so in this case. Furthermore, the meeting's Chairman
had not acted in good faith. The Court relied on the
principle as set out in Harben v Phillips.2

As a result it was held that the EGM was a nullity in its
entirety. Consequently, nothing decided at the EGM was
decided validly and it is as if the meeting was never held.
Support for this position was found in Pender v
Lushington3; Edwards v
Halliwell4; and Byng v London Life
Association5. It was held that board
resolutions passed irregularly but in good faith may be ratified by
shareholders. However, resolutions passed in bad faith, at a
meeting which is itself a nullity, are incapable of ratification.
The Court drew support for this principle from Northwest
Transport Company v Beatty6; Burland v
Earle7; and Clemens v Clemens Bros
Ltd8. Accordingly, the ordinary resolutions were
incapable of ratification.

As a consequence, Dr Chen was reinstated to the board of
directors of Fortuna. Issues then arose as to who the other
directors of Fortuna were and also the validity of actions taken by
the board since the date of the EGM.

Comment

This case is the subject of an appeal. However, it is
clear that care must be taken when conducting company meetings to
ensure that minority shareholders and their representatives are not
illegitimately prevented from participating. Failure to do so
can, in certain circumstances, risk the meeting being declared a
nullity and all business conducted therein invalid and incapable of
ratification.

1 Cause No. FSD 125 of
2012 (AHJ).

2 (1883) 23 Ch D
14.

3 [1887] 6 Ch D
70.

4 [1950] 2 All ER
1064.

5 [1990] 1 Ch 170
(CA).

6 (1887) 12 App Cas
589.

7 [1902] AC 83
(PC).

8 [1976] 2 All ER
268.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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